What Higher Education Institutions Need to Know About Tuition Discounting

By David Clark, CIA, CFE, CRMA, BDO USA

Universities and colleges in the U.S. are facing a challenging paradox. Over the past 20 years, tuition rates have increased a staggering amount, significantly outpacing inflation. For instance, the average tuition and fees for private universities ranked by U.S. News and World Report over this time have risen 144%, while the average in-state tuition and fees at public institutions have risen 212%. However, the actual net tuition revenue received by colleges and universities has only moderately increased, with some years even having an average net revenue decrease (inflation adjusted). So, how are colleges charging record-level tuition to students but hardly getting a financial benefit?

The gap between an institution’s established cost and the actual cost charged to students is known as the tuition discount. As institutions seek to attract and retain larger, more diverse classes, they continue to offer increased amounts of institutional aid and increase the average tuition discount across programs. This aid may be derived from restricted scholarship funds, but more often is structured as a decision to forgo potential revenue to reduce the cost to the student, which is also known as “unfunded aid.”

While tuition rates across the country rise, the average discount rate is reaching unprecedented levels, exceeding 50% for first-year students in recent years. Further, per the National Association of College and University Business Officers’ 2019 Tuition Discounting Study, nearly 90% of incoming students are receiving some form of institutional grant. In fact, the percentage of students paying full tuition rates is in the single digits for most higher education institutions. Even the most elite and competitive schools are only achieving approximately one-quarter of students paying full rates.

Public outcry over the volume of student debt and cost of college is at an all-time high, and the current presidential administration is considering various forms of intervention. So, why have colleges and universities not just put an end to the discounting practice and instead lowered tuition? Though the industry has seen a rash of “tuition resets” in recent years (e.g., drastic decreases in tuition rates to reflect the standard average cost paid by students), most institutions are wary of such a strategy and, at times, even advised against it. The reason being, much as with commercial goods, consumers still view a higher price as a sign of an item’s superior value (in this case, the education provided).

In actuality, a tuition reset has a relatively minor impact on the amount a student pays to attend a college or university, as students are already only directly responsible for the portion of the cost after institutional aid is applied. Therefore, the cost, which students are currently leveraging public and private grant and loan programs to pay, would still largely equate to the amounts owed under an overall lower tuition rate since most institutional aid is unfunded already. Institutions are using tuition discounting as the primary tool to provide financial support to students and meet or exceed enrollment targets as they consider overall financial aid packaging.

The best-case scenario for colleges and universities is to fund institutional aid through restricted funds and gifts established to provide student scholarships. However, the amount of funding set aside for this purpose in a given budget year likely pales in comparison to the overall tuition discount offered to enrolled students. Therefore, it’s critical to understand how operating budgets depend on tuition dollars and ensure that avenues are available to either fund operations through net tuition revenues and other revenue sources, or reduce costs to reflect the reduction in revenue resulting from the tuition discount.

Higher education institutions should also be cognizant of tuition discounting’s impact on enrollment. As schools get closer to the start of a new academic year and are looking to fill incoming classes, it may seem enticing to offer greater institutional aid to encourage higher enrollment. While those decisions may make short-term sense (it would be better to bring in 30 cents on the dollar for an additional student than not have any tuition revenue at all), it’s important to consider the potential downstream impact of that structure. Will offering more institutional aid now impact the level of discounting needed to recruit and retain future classes? How does aid provided in a student’s first year impact the aid offered in subsequent years for that student?

With the higher education sector already facing declining enrollment trends pre-COVID-19 and further uncertainty regarding class sizes in a post-COVID era, an institution’s tuition discount can become both a powerful tool and a potential pitfall.

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Education Credits

With school back in session, parents and students should look into tax credits that can help with the cost of higher education. Credits reduce the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may receive a refund.

There are two credits available to help taxpayers offset the costs of higher education. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) may reduce the amount of income tax owed. Taxpayers who pay for higher education can see these tax savings when they file their tax returns next year.

The American opportunity tax credit is:

· Worth a maximum benefit up to $2,500 per eligible student.

· Only for the first four years at an eligible college or vocational school.

· For students pursuing a degree or other recognized education credential.

· Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.

The lifetime learning credit is:

· Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.

· Available for all years of postsecondary education and for courses to acquire or improve job skills.

· Available for an unlimited number of tax years.

To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must receive a Form 1098-T from an eligible educational institution. The credits are subject to income limits: to claim the full amount, income must be below $80,000 for single taxpayers ($160,000 married filing jointly). Taxpayers cannot claim either credit if income exceeds $90,000 ($180,000 married filing jointly).

In general, qualified tuition and related expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools). The expenses paid during the tax year must be for: an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year. For the AOTC but not the LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study.

The following expenses do not qualify for the AOTC or the LLC:

· Room and board

· Transportation

· Insurance

· Medical expenses

· Student fees, unless required as a condition of enrollment or attendance

· Expenses paid with tax-free educational assistance

· Expenses used for any other tax deduction, credit or educational benefit

Please contact the Crosslin tax team if you have any questions related to education expenses and tax benefits.

New law extends COVID tax credit for employers who keep workers on payroll

The Internal Revenue Service urges employers to take advantage of the newly-extended employee retention credit, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted Dec. 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including modifying and extending the Employee Retention Credit (ERC), for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.

As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after Dec. 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.

Effective Jan. 1, 2021, employers are eligible if they operate a trade or business during Jan. 1, 2021, through June 30, 2021, and experience either:

  1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
  2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).

Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

In addition, effective Jan. 1, 2021, the definition of qualified wages was changed to provide:

  • For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts. 
  • For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.  

Retroactive to the Mar. 27, 2020, enactment of the CARES Act, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

If you have any questions, reach out to the Crosslin tax team at (615) 320-5500.  We are here to help! 

How the CARES Act changes deducting charitable contributions

Whether you are supporting natural disaster recovery, COVID-19 pandemic aid or another cause that’s personally meaningful to you, your charitable donations may be tax deductible. These deductions basically reduce the amount of their taxable income.

Here’s how the CARES Act changes deducting charitable contributions made in 2020:

Previously, charitable contributions could only be deducted if taxpayers itemized their deductions.

However, taxpayers who don’t itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. For the purposes of this deduction, qualifying organizations are those that are religious, charitable, educational, scientific or literary in purpose. The law changed in this area due to the Coronavirus Aid, Relief, and Economic Security Act. 

The CARES Act also suspends limits on charitable contributions and temporarily increases limits on contributions of food inventory.

If you have any questions regarding charitable contributions, please contact a member of the Crosslin tax team at (615) 320-5500.  We are here to help!